Advisor Input Sought in Looming Succession Plan Rules

Register now

Small and midsize RIAs could soon face new requirements to have a succession plan in place for their firms, and state securities regulators are asking for input from practitioners as they wrap up the rulemaking process.

On Aug. 1, after more than a year of development, the North American Securities Administrators Association released a proposed rule that would require advisors to formally address business continuity and succession planning within their firms, a move that comes in response to concerns about the graying of the advisor industry.

"The why part is easy," says Patricia Struck, administrator of Wisconsin's securities division and the chair of NASAA's investment advisor unit. "Obviously, the aging of our population generally presents unique challenges for one-person firms and especially sole proprietors, but as well as investment advisors generally. And it's the aging of the investor community, but also of investment professionals."


Speaking in an online presentation hosted by Columbia, Md.-based Pinnacle Advisor Solutions, a business consulting division of Pinnacle Advisory Group, to make a last push for feedback on the rules from advisors, Struck said that NASAA officials have been getting "reports from the front from examiners" who have observed the disruption that clients experience when the head of a solo practice is incapacitated by an illness or accident and has no contingency plan in place.

"When this happens the advisor still has a fiduciary duty to clients, and they also have regulatory responsibilities that survive their incapacity," Struck says.

NASAA is accepting comments from the public through Oct. 1 on its proposal, which includes a model rule and 18 pages of guidance for how firms might implement a succession and business continuity plan in their practice. The organization is asking advisors to weigh in on whether the proposal should be more specific, whether there are any significant issues it does not address, and to suggest any other modifications that regulators should consider.

Following the close of the comment period, NASAA will evaluate the feedback and likely produce a final rule sometime early next year, at which point state legislators and securities regulators will consider whether to adopt the provisions, according to Struck.


The rule figures to spur a major shift in industry practices. In June, the SEI Advisor Network released a survey that found that just 17% of advisors have a "binding and actionable" succession plan in place.

NASAA says that it is trying to avoid overly prescriptive regulation in its rule, acknowledging the significant variances in the operations of small and midsize firms overseen by state regulators, which generally include practices with less than $100 million in assets under management.

Chris Winn, founder and managing principal of AdvisorAssist, an RIA compliance firm, welcomes the flexible approach, saying that NASAA's proposal is "helpful in mandating something we already think every advisor should have."

"We need a starting point," Winn adds, "but I don't think it's appropriate for each state-registered advisor under $100 million to basically have the same blueprint, because everybody's unique."


As drafted, NASAA's rule would require state-regulated firms to have a formal, written plan for succession and business continuity planning that provides for "the protection, backup and recovery of books and records," as well as an alternate plan for communicating with clients, employees, regulators and other stakeholders should "key personnel" within the practice die or become incapacitated. Other provisions include the "assignment of duties to qualified responsible persons in the event of the death or unavailability of key personnel," and a plan to relocate the practice to another facility if disaster strikes the primary office.

Succession plans could take many forms. Some small practices have made reciprocal arrangements with other local firms to acquire one another's clients in the event that the lead advisor dies or becomes incapacitated. Others have opted to bring on and groom a junior advisor to eventually take the reins from the principal.

Whatever type of plan best fits a firm, however, Winn urges practices that don't have one in writing to make it a priority, and not to wait for NASAA's final rule to come out next year.

"The sooner you get started on a plan the better you're going to be in the long run," he says. "The best risk-management technique is get started today."

Kenneth Corbin is a Financial Planning contributing writer in Washington.

Read more:

For reprint and licensing requests for this article, click here.
Practice management Compliance Law and regulation Succession planning RIAs Financial planning